Financial Ombudsman Service 

FCA accused of underestimating impact of Fos hike

FCA accused of underestimating impact of Fos hike

The Financial Conduct Authority may have underestimated the impact of increasing the Financial Ombudsman Service's compensation limit on professional indemnity (PI) insurance premiums, experts have warned.

Last week the regulator confirmed it would increase the compensation limit available under the ombudsman from £150,000 to £350,000 on April 1, despite insurers forecasting it could push up PI insurance premiums by 500 per cent.

Focusing on the defined benefit pension transfer advice market, the FCA has estimated the price of PI insurance premiums for specialists in this area could increase to an upper limit of 140 per cent in a "worst-case" scenario. 

However, insurers predict this increase could be between 200 and 500 per cent.

Under the FCA's calculations, a 140 per cent increase would see the median PI insurance premium for a firm with two to five advisers increase from £3,400 to £8,000 and under a 500 per cent increase, median premiums for the same size firm would increase to £20,100. 

Former pensions minister Ros Altmann said she welcomes the increased compensation limit as being more in line with the values for DB transfers, but warned it is of "great concern" that the FCA may have under-estimated the impact on PI insurance costs for adviser firms.

She said: "It is really important that scheme members have access to professional expert independent advice.

"Already it is the case that many firms have pulled out of DB transfers and this move is likely to further accelerate the trend of consolidation and mergers, with large firms better able to handle rising PI costs." 

When approached with Ms Altmann's concerns, the FCA pointed to the workings outlined in its policy statement. 

Keith Richards, chief executive of the Personal Finance Society, said unintended consequences of the compensation limit increase could see more consumers left to fend for themselves or becoming victims to scams - something he said is "clearly in conflict" with the government's objective to increase access to advice.  

Mr Richards said: "The concerns surrounding DB transfers has sent some PI Insurers running for the hills, which has already left many advisers facing increased premiums, increased excesses and in some instances, no ongoing cover.

"The market continues to harden with increased costs being experienced across the sector and this latest move by the FCA will serve to compound the issue." 

He added: "Providing protection for consumers is a key mechanism to support confidence in the market but the operating cost and risk associated with regulated advice was already making it less accessible.

"The additional unintended consequences of this latest proposal will not be good news for the public and sector alike."

Steve Ray, director of professional indemnity at insurer Howden, said he had predicted the regulator would not go ahead with its proposals as insurers had made it "pretty clear" the increase would be unwelcome.  

Mr Ray said the increase comes at a time when the market is already unbalanced by the dual issues surrounding DB transfers and capacity issues occasioned by the Lloyd's Franchise Board’s review of syndicates.